Developing your own Franchise - A framework for Vietnamese Franchisors.pdf

1. VIETNAM NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS NGUYEN QUANG TIEP DEVELOPING YOUR OWN FRANCHISE – A FRAMEWORK FOR VIETNAMESE FRANCHISORS MASTER OF BUSINESS ADMINISTRATION THESIS Hanoi – 2010

2. VIETNAM NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS NGUYEN QUANG TIEP DEVELOPING YOUR OWN FRANCHISE – A FRAMEWORK FOR VIETNAMESE FRANCHISORS Major: Business Administration Code: 60 34 05 MASTER OF BUSINESS ADMINISTRATION THESIS Supervisor: Dr. Pham Quy Long, MBA Ha Nguyen Hanoi – 2010

3. i ACKNOWLEDGEMENT To me, writing Masters’ Thesis has been an extremely demanding and challenging task of hard work and effort. This work could not have been completed without the support of several special people. I would like to thank everyone who has helped and supported me during the writing of this thesis. First of all, I would like to express my profound gratitude to my supervisor – Dr. Pham Quy Long, MBA Ha Nguyen at Hanoi School of Business – Vietnam National University, who has shared his valuable knowledge and been very good mentor throughout the writing process. His professional advice and invaluable support have been highly appreciated during the research process. And I would like to give my special thanks to my family and my friends for their support and care for me. Hanoi School of Business, October 2010 Nguyen Quang Tiep

4. ii ABSTRACT DEVELOPING YOUR OWN FRANCHISE – A FRAMEWORK FOR VIETNAMESE FRANCHISORS Nguyen Quang Tiep MBA Candidate, 2007 – 2009 School of Business - Vietnam National University, Hanoi Supervisor: Dr. Pham Quy Long, MBA Ha Nguyen October 2010, 99 pages In recent years, the average growth rate of franchising businesses in Vietnam is 35%, five times faster than GDP growth. Total revenue of this sector is 36 million USD, 4 times higher than 5 years ago, and 12 times the revenue in 20001 . The expanding trend in franchising sector can be easily seen on the main streets of big cities like Hanoi, Ho Chi Minh or Da Nang. Big international franchising brands have come to Vietnam such as Kentucky Fried Chicken, Pizza Hut, Gloria Jean’s Coffee, Jollibee, Lotteria, The Body Shop. Franchising has been a favorable method for entrepreneurs to expand their businesses, from restaurant to airlines service, from rent-a-car to real estates consultancy. It is forecasted that in the next few years, franchising will be a hot zone for development, with an annual growth rate of 50%1 . However, in the bright picture of franchising in this market, we rarely see Vietnamese brands. Among 90 franchise systems operating in Vietnam2 , there are only a few brands developed and owned by Vietnamese entrepreneurs, and much fewer are considered to have some early success, namely Pho 24, Kinh Do Bakery… with humble systems which have not reach the regional competitive scale. 1 Vietnam Franchise Association 2 Nguoi dai bieu nhan dan newspaper, http://www.nguoidaibieu.com.vn/pPrint.aspx?itemid=87148

5. iii The thesis concentrates on the framework for Vietnamese franchisors to develop and manage franchise systems successfully. In the thesis, the author adopts mainly secondary research methods to domestic and foreign material sources to find out basic theories about franchising, analyze the opportunities and challenges to Vietnam franchisors, and develop the appropriate framework to build franchise systems in Vietnam. The systematical, statistical, analytical methods are also applied to analyze all collected data. The thesis is presented in three chapters. The first chapter gives a general overview about franchising, types and history of franchising, industries most suitable for franchising and why people want to franchise their businesses. More importantly, the key success factors for franchisors are listed and illustrated by the case of Jollibee Food Corporation, Philippines. Chapter 2 concentrates on studying the franchising market in Vietnam, the macro environment for franchising and the challenges with which Vietnamese franchisors are facing. From this chapter, we understand that Vietnam franchising market is just at the very initial stage and has great potential for development. Despite a favorable environment, Vietnamese franchisors have not been successful in dominating the domestic market with their own systems. In the final chapter, the author suggests a master framework for building franchise systems in Vietnam, in which the most critical and typical items related to franchise building are discussed and categorized into 4 main strategic steps: concept, pilot, expansion and mature. The findings indicate that Vietnamese entrepreneurs have a great opportunities in franchising sector, and can overcome the challenges by applying the suggested framework.

6. iv TÓM TẮT HƯỚNG DẪN XÂY DỰNG HỆ THỐNG NHƯỢNG QUYỀN THƯƠNG MẠI TẠI VIỆT NAM Nguyễn Quang Tiệp Học viên MBA, khóa 2007 – 2009 Khoa Quản trị Kinh doanh, Đại học Quốc gia Hà Nội Giáo viên hướng dẫn: TS. Phạm Quý Long, ThS. Hà Nguyên Tháng 10 năm 2010, 99 trang Trong những năm gần đây, tốc độ tăng trưởng trung bình của ngành nhượng quyền thương mại là 35%, gấp 5 lần tốc độ tăng GDP. Tổng doanh thu của ngành này là 36 triệu USD, gấp 4 lần doanh thu 5 năm trước, và gấp 12 lần tổng doanh thu năm 20003 . Xu thế phát triển của nhượng quyền thương mại thể hiện rõ nét trên những con phố chính của các thành phố lớn như Hà Nội, Hồ Chí Minh, Đà Nẵng. Những thương hiệu nhượng quyền lớn của thế giới đã đến Việt Nam như Gà rán Kentucky, Pizza Hut, cà phê Gloria Jean’s, Jollibee, Lotteria, The Body Shop Nhượng quyền thương mại đang là phương thức kinh doanh được nhiều doanh nghiệp lựa chọn để tăng trưởng, từ nhà hàng cho tới dịch vụ hàng không, từ cho thuê xe cho tới tư vấn bất động sản. Theo dự báo, trong một vài năm tới, nhượng quyền thương mại sẽ là ngành phát triển nóng với tốc độ tăng trưởng hàng năm lên tới 50%3 . Tuy nhiên, trong bức tranh tươi sáng của thị trường nhượng quyền thương mại, các thương hiệu Việt Nam còn đóng vai trò rất khiêm tốn. Trong số 90 hệ thống nhượng quyền đang hoạt động tại Việt Nam4 , chỉ có một số thương hiệu do người Việt Nam phát triển và sở hữu, và trong đó chỉ có một số ít được coi là bước đầu thành công như 3 Hiệp hội Nhượng quyền thương mại Việt Nam (VFA) 4 Nguoi dai bieu nhan dan newspaper, http://www.nguoidaibieu.com.vn/pPrint.aspx?itemid=87148

7. v Phở 24, Bánh Kinh Đô với những mạng lưới còn khiêm tốn, chưa đạt tới đẳng cấp có thể cạnh tranh trong khu vực. Khóa luận tập trung vào việc xây dựng một bộ khung các phương pháp để phát triển và quản lý hệ thống nhượng quyền thương mại tại Việt Nam. Trong khóa luận này, tác giả chủ yếu sử dụng phương pháp nghiên cứu thứ cấp, sử dụng nguồn tài liệu nước ngoài và trong nước để đưa ra những lý thuyết cơ bản về nhượng quyền, phân tích cơ hội và thách thức cho các nhà nhượng quyền Việt Nam, đồng thời phát triển các phương pháp phù hợp để xây dựng hệ thống nhượng quyền tại Việt Nam. Sau đó, người viết sử dụng các phương pháp phân tích, thống kê, hệ thống để phân tích dữ liệu thu thập được. Khóa luận được trình bày trong 3 chương. Chương 1 đưa ra tổng quan về nhượng quyền thương mại, các loại hình và lịch sử nhượng quyền, các ngành phù hợp để nhượng quyền và lý giải vì sao các doanh nghiệp lại lựa chọn nhượng quyền để phát triển. Quan trọng hơn, các nhân tố chính quyết định thành công trong nhượng quyền thương mại đã được nêu ra và minh họa thông qua việc phân tích sự thành công của Jollibee (Philipin) Chương 2 tập trung nghiên cứu thị trường nhượng quyền thương mại tại Việt Nam, môi trường vĩ mô cho nhượng quyền, và các khó khăn mà các nhà nhượng quyền Việt Nam đang phải đối mặt. Chương này giúp chúng ta hiểu được thị trường nhượng quyền tại Việt Nam mới đang ở giai đoạn đầu và có tiềm năng phát triển rất lớn. Mặc dù có được môi trường vĩ mô thuận lợi, các doanh nghiệp Việt Nam vẫn chưa tận dụng được để phát triển hệ thống nhượng quyền thương mại của riêng mình nhằm chiếm lĩnh thị trường nội địa. Trong chương 3, tác giả đề xuất một mô hình khung để xây dựng các hệ thống nhượng quyền thương mại tại Việt Nam. Trong đó, các công việc quan trọng và đặc trưng nhất

8. vi của nhượng quyền thương mại sẽ được bàn luận chi tiết và chia thành bốn bước chiến lược chủ đạo: đánh giá ý tưởng, thử nghiệm, mở rộng và duy trì. Kết luận của nghiên cứu cho thấy các doanh nghiệp Việt Nam có cơ hội lớn trong ngành nhượng quyền thương mại, và có thể vượt qua những thách thức bằng việc áp dụng mô hình đã được tác giả đề xuất.

9. vii TABLE OF CONTENTS ACKNOWLEDGEMENT.......................................................................................................................i ABSTRACT.............................................................................................................................................ii TÓM TẮT...............................................................................................................................................iv TABLE OF CONTENTS......................................................................................................................vii LIST OF TABLES ..................................................................................................................................x LIST OF FIGURES ...............................................................................................................................xi LIST OF ABBREVIATIONS...............................................................................................................xii CHAPTER 1: FRANCHISING OVERVIEW......................................................................................4 1.1 Franchising definition.............................................................................................................4 1.2 Types of Franchising...............................................................................................................6 1.2.1 Traditional franchising....................................................................................................6 1.2.2 Business-format franchising............................................................................................8 1.2.3 The differences between traditional franchising & business-format franchising.........9 1.3 Reasons for being a franchisor.............................................................................................10 1.4 Industries suitable for franchising.......................................................................................12 1.5 Common success factors for franchising.............................................................................15 1.5.1. A successful prototype location (or chain of stores) .....................................................15 1.5.2. A strong management team ...........................................................................................16 1.5.3. Sufficient capitalization .................................................................................................17 1.5.4. A distinctive and protected trade identity.......................................................................18 1.5.5. Proprietary and proven methods of operation and management .................................19 1.5.6. A demonstrated market demand for the product and services......................................20 1.5.7. Comprehensive training programs for franchisees ......................................................21 1.5.8. A set of carefully developed uniform site selection criteria and architectural standards 23 1.5.9. A franchisee profile and screening system....................................................................24 1.5.10. An effective system of reporting and record keeping....................................................24 1.5.11. Field support staff ..........................................................................................................25 1.5.12. Research and development capabilities.........................................................................25 1.5.13. National, regional, and local advertising, marketing, and public relations programs25 1.6 Success factors applied to Jollibee case...............................................................................26 1.6.1 Corporate profile:...........................................................................................................27 1.6.2 Analyze the success of JFC by key franchising success factors...................................27 1.6.2.1. Successful prototype: Good.....................................................................................27 1.6.2.2. Management team: Excellent..................................................................................28 1.6.2.3. Capitalization: Good...............................................................................................28 1.6.2.4. Trade identity: Good...............................................................................................28 1.6.2.5. Methods of operation and management: Good.......................................................29 1.6.2.6. Market demand: Excellent ......................................................................................30 1.6.2.7. Training: Good........................................................................................................31 1.6.2.8. Site selection criteria: Good ...................................................................................31 1.6.2.9. Franchisee screening system: Good .......................................................................31 1.6.2.10. Reporting and record keeping system .....................................................................32

10. viii 1.6.2.11. Field support staff: Good........................................................................................32 1.6.2.12. R&D: Good.............................................................................................................33 1.6.2.13. Marketing & Advertising: Good .............................................................................34 CHAPTER 2: FRANCHISING IN VIETNAM......................................................................................35 2.1. An overview of Vietnam franchising market......................................................................35 2.2. Franchising environment in Vietnam..................................................................................39 2.2.1. Political environment .....................................................................................................40 2.2.2. Legal environment..........................................................................................................42 2.2.3. Economic environment ..................................................................................................45 2.2.4. Financial environment...................................................................................................46 2.2.5. Social environment.........................................................................................................48 2.3. Challenges to opening a new franchise system in Vietnam ...............................................49 2.3.1. Lack of experience .........................................................................................................53 2.3.2. Insufficient franchising consultancy.............................................................................54 CHAPTER 3: FRAMEWORK FOR BUILDING A FRANCHISE SYSTEM................................56 3.1. Framework introduction ......................................................................................................56 3.2. Concept stage.........................................................................................................................57 3.2.1. Industry assessment........................................................................................................57 3.2.1.1. Production and distribution occur in limited geographic markets. ........................57 3.2.1.2. Physical locations are helpful to serving customers...............................................59 3.2.1.3. Local market knowledge is important to performance............................................59 3.2.1.4. Brand name reputation is a valuable competitive advantage. ................................60 3.2.1.5. The level of standardization and codification of the process of creating and delivering the product or service is high.....................................................................................60 3.2.1.6. The operation is labor intensive..............................................................................61 3.2.1.7. Outlets are not terribly costly to establish. .............................................................62 3.2.2. Concept assessment........................................................................................................62 3.2.2.1. Valuable system to sell............................................................................................63 3.2.2.2. Transferable concept...............................................................................................63 3.2.2.3. Large pool of potential franchisees.........................................................................65 3.3. Pilot stage...............................................................................................................................67 3.3.1. Site selection...................................................................................................................67 3.3.1.1. Density of the primary target audience...................................................................68 3.3.1.2. Traffic volume .........................................................................................................68 3.3.1.3. Traffic patterns........................................................................................................68 3.3.1.4. Site visibility............................................................................................................69 3.3.1.5. Traffic flow to the site .............................................................................................69 3.3.1.6. Complementary versus contracdictory neighbors...................................................69 3.3.2. Trade identity development & protection ......................................................................72 3.3.3. Operations manual.........................................................................................................72 3.3.3.1. Guidelines for preparation of the manual...............................................................72 3.3.3.2. Suggested outline for the operations manual of a franchisor .................................74 3.4. Expansion stage.....................................................................................................................77 3.4.1. Pricing franchise............................................................................................................77 3.4.1.1. Franchise fee...........................................................................................................77

11. ix 3.4.1.2. Royalty rate.............................................................................................................79 3.4.2. Franchise agreement preparation .................................................................................81 3.4.2.1. Rights granted.........................................................................................................82 3.4.2.2. Territory..................................................................................................................82 3.4.2.3. Services to be provided by the franchisor ...............................................................82 3.4.2.4. Supplying the products............................................................................................83 3.4.2.5. Franchise, royalty and other fees payable to franchisor and reporting .................84 3.4.2.6. Quality control ........................................................................................................85 3.4.2.7. Protection of intellectual property ..........................................................................85 3.4.2.8. Termination of the franchise agreement .................................................................86 3.4.3. Franchisee recruitment..................................................................................................86 3.4.3.1. Industry experience.................................................................................................87 3.4.3.2. Net worth requirements...........................................................................................87 3.4.3.3. Psychological attributes..........................................................................................88 3.5. Mature stage..........................................................................................................................88 3.5.1. Monitoring quality..........................................................................................................89 3.5.1.1. Field support...........................................................................................................89 3.5.1.2. External service audits............................................................................................90 3.5.1.3. Peer review..............................................................................................................91 3.5.1.4. Analytical tools........................................................................................................91 3.5.1.5. Customer feedback..................................................................................................92 3.5.2. Monitoring franchisee financial reporting ...................................................................92 3.5.2.1. Point of sale systems ...............................................................................................93 3.5.2.2. Financial reporting.................................................................................................94 3.5.2.3. Financial audits ......................................................................................................94 CONCLUSION......................................................................................................................................96 LIST OF REFERENCES .....................................................................................................................98 APPENDIX 1.......................................................................................................................................100

12. x LIST OF TABLES Item Table Description Page 1.1 Main differences between 2 types of Franchising 9 1.2 Top ten industries for franchising in percent of franchisors 14 1.3 Average number of years franchisors are in operation before franchising for selected industries 17 1.4 Average annual outlet turnover rates for selected industries 22 1.5 Portion of a sample training agenda from a restaurant franchisor 23 1.6 Average advertising fee by industry 27 2.1 Vietnam franchising market compared to other ASEAN countries 37 2.2 Vietnam franchising in 2008 39 2.3 Franchising market size of biggest cities in ASEAN 40 2.4 Franchising business environment in Vietnam 40 2.5 New companies registered by year 43 2.6 Items required for disclosure in a UFOC 44 2.7 Annual GDP growth rate & GDP per capita of Vietnam (‘90- ‘09) 46 2.8 Selected information depicting Vietnam infrastructure 46 2.9 Foreign franchising brands registered in Vietnam 50 3.1 Industry & concept assessment template 67 3.2 Site selection template 71 3.3 Sample operations manual outline 75

13. xi LIST OF FIGURES Item Figure Description Page 1.1 Franchise definition illustration 6 1.2 Percentage of franchised outlets by size of the system 11 1.3 Franchise systems with at least one active franchised unit during the period of 2001-2005 11 1.4 Strategic options for business growth 13 1.5 Franchise systems reporting units during 2001-2005 15 1.6 Maximum total initial investment by industry 18 1.7 Average first 3 years net income for franchising concepts founded 2000-2004 19 1.8 Sample operations manual provisions concerning garbage and refuse 20 1.9 Purchase behavior quick screen 25 1.10 Jollibee logo 38 1.11 Jollibee strategy 31 1.12 Jollibee’s R&D process 34 2.1 Vietnam franchising market 36 2.2 Vietnam franchise sector structure 39 2.3 Vietnam inflation rate 48 2.4 VND/USD exchange rate 48 3.1 Framework for building a franchise system 57

14. xii LIST OF ABBREVIATIONS AMACOM American Management Association ASEAN Association of Southeast Asian Nations BOTP Basic Operations Training Program CIA Central Intelligence Agency FDI Foreign Direct Investment FTC Federal Trade Commission GDP Gross Domestic Products HCMC Ho Chi Minh City KFC Kentucky Fried Chicken JFC Jollibee Foods Corporation PERC Political & Economic Risk Consulting Organization R&D Research and Development TTC Tony Tan Caktiong VND Vietnam Dong VFA Vietnam Franchising Association UFOC Uniform Franchise Offering Circular U.S United States USA United States of America USD United States Dollars USDOC United States Department of Commerce WFA World Franchising Council

15. 1 INTRODUCTION The emergency and objectives of the research The reform of Vietnam has been taking place totally and deeply in many fields. The event that Vietnam became the official member of the World Trade Organization (WTO) put an important mark in the integrating process into the world economy. Vietnam’s economy has grown fast, in the last twenty years GDP of Vietnam increased by over 7% on average.5 The franchising sector first came to Vietnam in early 1990s, and after 15 years, the total revenue in this sector grew 24 times, from 1.5 million USD in 1996 to 36 million USD in 2010 (estimated).6 However, the major portion of this market is dominated by foreign brands. Vietnamese companies haven’t succeeded in leveraging the local market understanding to make a successful franchise system in order to directly compete with international franchise systems in domestic market. With the objective to contribute to finding a suitable method for developing franchise systems in Vietnam, I have chosen the topic “FRAMEWORK FOR BUILDING FRANCHISE SYSTEMS IN VIETNAM”. The objectives of the research are to: - Present an overview of franchising and provide the key franchising success factors - Provide an analysis of the franchising market in Vietnam - Recommend a master framework for Vietnamese franchisors to build their own franchise systems. 5 The CIA World Fact Book 2009 6 Vietnam Franchise Association

16. 2 Subject and scope The subject concentrates on the framework for franchise system development. In which, it will specially suggests the activities needed to develop a business-format franchise in Vietnam. Research methodology: In the thesis, the author adopts mainly secondary research methods to domestic and foreign material sources to find out basic theories about franchising, analyze the opportunities and challenges to Vietnam franchisors, and develop the appropriate framework to build franchise systems in Vietnam. The systematical, statistical, analytical methods are also applied to analyze all collected data. The structure of the thesis The thesis is presented in three chapters in which the first chapter will give basic definitions and most general theories about the researched problem of this thesis. The second chapter will analyze the current situation of Vietnamese market and give judgements about the opportunities and challenges for Vietnamese franchisors. The third chapter will give some recommendations about the master framework to build a franchise system in Vietnam. Chapter 1: Franchising overview The first chapter gives a general overview about franchising, types and history of franchising, industries most suitable for franchising and why people want to franchise their businesses. More importantly, the key success factors for franchisors are listed and illustrated by the case of Jollibee Food Corporation, Philippines.

17. 3 Chapter 2: Franchising in Vietnam Chapter 2 concentrates on studying the franchising market in Vietnam, the macro environment for franchising and the challenges with which Vietnamese franchisors are facing. From this chapter, we understand that Vietnam franchising market is just at the very initial stage and has great potential for development. Despite a favorable environment, Vietnamese franchisors have not been successful in dominating the domestic market with their own systems. Chapter 3: Framework for building your own franchise In the final chapter, the author suggests a master framework for building franchise systems in Vietnam, in which the most critical and typical items related to franchise building are discussed and categorized into 4 main strategic steps: concept, pilot, expansion and mature.

18. 4 CHAPTER 1: FRANCHISING OVERVIEW 1.1 Franchising definition According to the American Heritage Dictionary of the English Language, the word franchise comes from the old French word franche, which means free or exempt.7 In medieval times, a franchise was a right or privilege granted by a sovereign power – king, church, or local government. Sovereigns granted franchises for various activities, such as building roads, holding fairs, organizing markets, or for the right to maintain civil order and collect taxes. In essence, the sovereign gave an individual or group of individuals the monopoly rights over a particular activity in a particular location for a certain period of time. In most cases, the grantee was required to make a payment to the sovereign power for this right or privilege, usually in the form of a share of the product or profit. That payment was called a royalty, a term still in use to this day. The meaning of this word is similarly reflected in many laws and definitions around the world. According to International Franchise Association, “a franchise is the agreement or license between two legally independent parties which gives: • a person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor) • the franchisee the right to market a product or service using the operating methods of the franchisor • the franchisee the obligation to pay the franchisor fees for these rights 7 American Heritage Dictionary of the English Language, Fourth Edition (2000), Boston, Houghton Mifflin Company.

19. 5 • the franchisor the obligation to provide rights and support to franchisees”8 According to the Federal Trade Commission (FTC), the body that has jurisdiction in the United States over federal disclosure rules for franchisors, three elements must be present for a business relationship to be deemed a franchise. First, the franchisor must license a trade name and trademark that the franchisee operates under, or the franchisee must sell products or services identified by this trademark. Second, the franchisor must exert significant control over the operation of the franchisee or provide significant assistance to the franchisee. Third, the franchisee must pay at least $500 to the franchisor at any time before or within the first six months of operation. 9 In Vietnam, although franchise business started much later than other countries, we have already defined this in 2005 Commercial law as follow: “Franchising is a business activity in which the franchisor allows and requests the franchisee to buy/sell products, provide services according to following conditions: 1. The buying/selling of products, providing of services is carried out under the business processes set by the franchisor, and associated with franchisor’s trade mark, trade name, know-how, slogan, logo and advertisement. 2. The franchisor has the rights to control and support franchisee in running the franchise business”10 Unfortunately, the definition in Vietnam Commercial law does not mention about fee for the franchised rights, which is one of the main motives for the fast development of franchising nowadays. From the above mentioned 3 definitions, a diagram can be drawn to illustrate franchising as below: 8 IFA Educational Foundation (2001): “An introduction to Franchising” (P.5) 9 Federal Trade Commission (1979): http://www.ftc.gov/bcp/franchise/netrule.htm 10 Vietnam Commercial law (2005), Article 284

20. 6 Figure 1.1: Franchise definition illustration (Source: IFA Educational Foundation (2001): “An introduction to Franchising”) In later parts, the author will take a deeper look at the elements of this diagram such as finance, advertising and marketing, training, royalty fees… 1.2 Types of Franchising The broad category of franchising is made up of two different business models: traditional franchising (also known as product franchising) and business format franchising. 1.2.1 Traditional franchising Traditional franchising is an arrangement in which one party, a franchisor, develops a trade name and licenses it to another party, a franchisee. The product franchisee contracts for the use of the name to deliver products or services to end customers for a certain time period at a certain location.11 As the name suggests, traditional franchising is the oldest form of modern franchising. By most accounts, it can be traced back in the U.S. at least to the mid-1800s when the McCormick Harvesting Machine Company and the Singer Sewing Machines Company sold their products through sales agents who were given exclusive sales territories. 12 11 Scott A. Shane (2005): “From Ice cream to the Internet – Using franchising to drive the growth and profits of your business” – Pearson Education, Inc 12 Thomas S. Dicke (1992): “Franchising in the America: The development of a business method, 1840 – 1980”. Chapel Hill, NC: University of North Carolina Press

21. 7 Initially, these firms, like others who used such agents at the time, imposed few restrictions or qualifications on their agents and exerted very little control over them. Over time, however, both companies found they needed more control over these sales agents if they were to protect their respective reputations and brands. The McCormick Company responded by establishing company owned branch houses throughout the U.S. and Canada. These branch houses were given oversight responsibilities for the sales agents in their territories. As a result, McCormick was able to systematize procedures and communications with its agents, thereby transforming them into what one would now call “dealers.” As for the Singer Company, it addressed the need for control by converting many of the independent agencies into company outlets. More importantly, it devised a series of recommendations for the remaining agents as to how the offices should be run and, for the first time, required detailed financial reporting from these agents. The contracts and methods of control that Singer developed at the time are largely recognized as the forerunners of the modern franchise agreement. Traditional franchising today is comprised largely of automobile dealerships, gasoline service stations, and soft-drink bottlers. In all of these businesses, the franchisor is a manufacturer who sells finished or semi- finished products to its dealers/franchisees. In turn, the franchisees resell these products to consumers or other firms in the distribution chain. Because the franchisor’s product is sold to its franchisees, the franchisor’s profits from its dealer network flow from the markups it earns on these products. In contrast to what occurs in business-format franchising, as described below, traditional franchisees do not pay running royalties on their sales. In Vietnam, the most phenomenal and recognizable Vietnamese traditional franchise is the Trung Nguyen coffee which spread out all over the country in the late 1990s.

22. 8 1.2.2 Business-format franchising Business-format franchising is a type of franchising in which the franchisor primarily sells a way of doing business (i.e., a business format) to its franchisees. A business- format franchise thus “includes not only the product, service, and trademark, but the entire business format itself – a marketing strategy and plan, operating manuals and standards, quality control, and continuing two-way communication”13 The first true business-format franchise system was created by Martha Mathilda Harper14 . This entrepreneur developed her network of Harper Beauty Shops from the early 1890s onward using a business model that included all of the components of a business format as described by the USDOC, and more. But though she grew her network to more than 500 shops in the U.S., Canada, and Europe by the mid-1920s, Mathilda Harper unfortunately did not leave a lasting mark on franchising. It was only until the 1950s, with the advent of chains such as Burger King and McDonald’s, and the economic boom of the post–World War II era, that business- format franchising fully came into its own in the U.S. and Canada, and throughout much of the rest of the world. Business-format franchising today encompasses a very large number of firms that provide a wide array of goods and services: automotive products and services, business aids and services, construction and maintenance, childcare services, and non-food retailing as well as the more visible hotel, fast-food, and car rental franchises. In exchange for the business format, franchisees typically pay a relatively small lump- sum fixed fee at the beginning of the contract period and pay running royalties that are usually calculated as a fixed percentage of the franchisee’s sales revenues. Business- format franchisees also often contribute an additional fraction of their sales or revenues 13 United States Department of Commerce (USDOC) (1988): “Franchising in the Economy” 14 Jane R. Plitt (2000): “Martha Mathilda Harper and the American dream”, New York Syracuse University Press

23. 9 toward an advertising fund for the chain as a whole. Presumably, the advertising carried out with these funds benefits all franchisees and thereby benefits the franchisor as well. This business-format franchising has become the most popular type of franchising in the world today, and also in Vietnam. We have seen many world’s famous franchising brands such as KFC, Pizza Hut, Lotteria, Jollibee coming to Vietnam since 1990s, and the rise of local brands such as Pho 24, Kinh Do Bakery… 1.2.3 The differences between traditional franchising & business-format franchising The major differences between traditional franchising and business-format franchising can be summarized in the table below: Table 1.1: Main differences between 2 types of Franchising Category Traditional franchising Business-format franchising Franchisee can use Franchisor’s trade name, logo Franchisor offers an operating system to franchisee Uniformity in the operations of franchise outlets Franchisee contribute to whole system’s marketing and advertising Compensation to franchisor Product whole sale to franchisee Royalty fee (Source: author)

24. 10 1.3 Reasons for being a franchisor There are a wide variety of reasons cited by successful franchisors as to why franchising has been selected as a method of growth and distribution.15 Through franchising, they are able to: · Obtain operating efficiencies and economies of scale: Figure 1.2 below shows the relationship between the size of a chain in the number of outlets and the reliance on franchising. It indicates that larger chains have a greater reliance on franchising than smaller ones Figure 1.2: % of franchised outlets by size of the system Source: Adapted from data contained in R. Bond (2004): “Bond’s Franchise Guide”, Oakland, CA: Sourcebook Publications · Increase market share and build brand equity: According to a recent research by International Franchise Association, 47% of all franchise systems have more than 15 Andrew J. Sherman (2004): “Franchising & Licensing – Two powerful ways to grow your business in any economy”, American Management Association (AMACOM)

25. 11 51 franchised units, and only 25% of them have less than 10 franchised units (see Figure 1.3 below) Figure 1.3: Franchise systems with at least one active franchised unit during the period of 2001-2005. (Sample size: 1,675 franchise systems) Source: International Franchise Association (3/2007): “The Profile of Franchising” · Use the power of franchising as a system to get and keep more and more customers-building customer loyalty. · Reach the targeted consumer more effectively through cooperative advertising and promotion. · Sell products and services to a dedicated distributor network. · Replace the need for internal personnel with motivated owner/operators. · Shift the primary responsibility for site selection, employee training and personnel management, local advertising, and other administrative concerns to the franchisee, licensee, or joint venture partner with the guidance or assistance of the franchisor.

26. 12 · Achieve more rapid market penetration at a lower capital cost: Figure 1.4 shows the strategic options that a firm can choose to grow based on its own intellectual property, and franchising is among the options that requires low investment thus have short time to payback. Figure 1.4: Strategic options for business growth Source: Andrew J. Sherman: “Franchising & Licensing – two powerful ways to grow your business in any economy”, AMACOM 1.4 Industries suitable for franchising Today franchising occurs in more than 80 different industries. Included among them are automobile repair, camera sales, car washes, drug stores, fast food, hair care, oil lubrication, photocopying, restaurants, and weight loss centers. While the list of industries in which franchising takes place is impressive - and with franchising spread over 80 industries, the breadth of this organizational form is quite large - franchising is far from a universally applicable way of doing business.

27. 13 Franchising does not occur in literally hundreds of industries. Moreover, franchising is highly concentrated in just a few industries. One study from the International Franchise Association drawn from a database of 2,471 franchise systems reports that 20 percent of all franchise systems are found in fast food and 11 percent are found in general retail. 16 Other data sources provide similar results. Table 1.2 summarizes the percentages of franchisors for the most popular industries for franchising as reported in the Sourcebook of Franchise Opportunities. Table 1.2: Top ten industries for franchising in percent of franchisors Industry Percent of franchisors Percent of franchised units Fast food 15.2 26.8 Restaurant 7.0 3.8 Automotive products 6.2 5.5 Maintenance and cleaning 5.4 8.2 Building and remodeling 4.9 1.5 Specialty retail 3.8 1.5 Specialty food 3.8 2.0 Health and fitness 3.3 3.5 Child development 3.2 0.7 Lodging 3.1 5.9 Source: Adapted from data contained in R. Bond’s “Bond’s Franchise Guide, 15th Annual Edition” (Oakland, CA: Sourcebook Publications, 2004). 16 International Franchise Association (3/2007):” The Profile of Franchising”

28. 14 Other evidence shows that franchisors perform much better in certain industries than in others. Franchisors now account for the majority of sales in tax preparation, printing and copying, and specialty food retailing, and close to half of all sales in fast food, restaurants and lodging. This suggests that these industries are particularly good ones for franchising. Several research studies also demonstrate the favorability of certain industries for franchising. Figure 1.5 proves that Fast food, Retail, and Service businesses are the industries that not only have biggest number of franchise systems but also contain majority of large scale systems. Figure 1.5: Franchise systems reporting units during 2001-2005 Source: International Franchise Association (3/2007): “The Profile of Franchising” The somewhat limited range of industries in which franchising operates, combined with the concentration of franchising in a handful of industries and the evidence of better franchisor performance in some industries than in others, suggests that an important issue for any potential franchisor is to determine whether franchising is

29. 15 appropriate for the industry in which the company operates. In chapter 3, we are going to analyze the factors that make an industry more suitable for franchising than another. 1.5 Common success factors for franchising17 We all know that there is no one-size-fits-all solution to all the business situations. However, if all the differences in market, business environment, and organizational behavior… are blurred, we can come up with a few basic factors that every franchise system must have in order to succeed: 1.5.1. A successful prototype location (or chain of stores) This is the most critical success factor which all franchise systems must consider before franchising. The pilot store(s) will serve as a basis for the franchising program. The store or stores must have been tested, refined, and operated successfully and be consistently profitable. The success of the prototype should not be too dependent on the physical presence or specific expertise of the founders of the system. In fact, many franchisors who jumped to franchising their concept despite unproven and inconsistent success in prototype location faced a lot of difficulties when the system grew larger, and most likely would fail. Responsible and sustainable franchising businesses often see big efforts and many years spent on refining the prototype store(s). Table 1.3 provides information on the average number of years that franchisors are in operation before franchising for selected industries. 17 Andrew J. Sherman (2004): “Franchising & Licensing – Two powerful ways to grow your business in any economy”, American Management Association (AMACOM)

30. 16 Table 1.3: Average number of years franchisors are in operation before franchising for selected industries Source: Scott A. Shane (2005): “From Ice cream to the Internet – Using franchising to drive the growth and profits of your business” – Pearson Education, Inc 1.5.2. A strong management team I do not mention about the management team of a mature system. This is the team in the very first steps of franchising, which is made up of internal officers and directors (as well as qualified consultants) who understand both the particular industry in which the company operates and the legal and business aspects of franchising as a method of expansion. After the successful prototype, management team is the next critical factor that challenges the franchisor. Management team and its expertise can help the franchisor in 2 ways: to join from building to refining the prototype, or to use franchising tools to expand the system from successful existing store(s). The latter way

31. 17 often involves qualified franchising consultants – whose jobs arise together with the fast development of franchising nowadays. 1.5.3. Sufficient capitalization Although franchising is an efficient way to expand the business with apparently low investment required and short time to payback (according to figure 1.4), the franchisor still need sufficient fund to launch and sustain the franchising program to ensure that capital is available for the franchisor to provide both initial and ongoing support and assistance to franchisees. The initial investment may vary in different industries as shown in figure 1.6 which is the results of a research on a database of 1,970 franchise system in the U.S. Figure 1.6: Maximum total initial investment by industry (unit: USD) Source: International Franchise Association (3/2007): “The Profile of Franchising”

32. 18 Aside from initial investment, in the first years, franchisors tend to spend whatever they make (and maybe more) on operations, brand building and development, which will also results in negative cash flow. For which reason, sufficient capitalization is very important for the franchisor before the income and royalty fee from franchisees can support the cash flow. Figure 1.7 helps us understand the situation of the franchisors in their first 3 years of franchising. Figure 1.7: Average first 3 years net income for franchising concepts founded 2000-2004 Source: International Franchise Association (3/2007): “The Profile of Franchising” The lack of a well-written business plan and adequate capital structure are often the principal causes of the demise of many franchisors. 1.5.4. A distinctive and protected trade identity In the long run, virtually there is no unique operation method or product. McDonald’s is not selling the best hamburger in the world, but they are still one of the biggest fast food chains. It’s because of the trade identity, which makes a franchise system stands out in the mind of customers. Trade identity includes registered trademarks, as well as a uniform trade appearance, signage, slogans, trade dress, and overall image. The franchisor must have a vision of how wide the system would grow, which markets

33. 19 (especially overseas markets) the system would enter so that the trademarks could be registered accordingly. The case of Trung Nguyen Company who had to buy their own brand in U.S. market, which was already registered by someone else, is a bitter and sound lesson. 1.5.5. Proprietary and proven methods of operation and management This is surely the most tiring part of building a franchise. The comprehensive operations manual is the result of years of operations in the prototype location. There is no best or final operations manual but continuous efforts to refine all the processes to reach higher effectiveness, and more important, higher sales. The manual must not be too easily duplicated by competitors, maintain their value to the franchisees over an extended period of time, and be enforced through clearly drafted and objective quality control standards. Figure 1.8 shows how clear and detailed a manual could be in a service franchise system. Figure 1.8: Sample operations manual provisions concerning garbage and refuse. Containers (1) Garbage and refuse shall be kept in durable, easily cleanable, insect-proof and rodent- proof containers that do not leak and do not absorb liquids. Plastic bags and wet-strength paper bags may be used to line these containers, and they may be used for storage inside the food service establishment. (2) Containers used in food preparation and utensil washing areas shall be kept covered after they are filled. (3) Containers stored outside the establishment, and dumpsters, compactors, and compactor systems shall be easily cleanable; provided with tight-fitting lids, doors, or covers; and shall be kept covered when not in actual use. In containers designed with drains, drain plugs shall be in place at all times, except during cleaning. (4) There shall be a sufficient number of containers to hold all the garbage and refuse that accumulates. (5) Soiled containers shall be cleaned at a frequency to prevent insect and rodent attraction. Each container shall be thoroughly cleaned on the inside and outside in a way that does not contaminate food, equipment, or utensils, and detergent or steam shall be provided and used for washing containers. Liquid waste from compacting or cleaning operations shall be disposed of as sewage.

34. 20 Source: Andrew J. Sherman (2004): “Franchising & Licensing – Two powerful ways to grow your business in any economy”, American Management Association (AMACOM) 1.5.6. A demonstrated market demand for the product and services The franchisor’s products and services should meet certain minimum quality standards, not be subject to rapid shifts in consumer preferences (e.g., fads), and be proprietary in Storage (1) Garbage and refuse in the premises shall be stored in a manner to make them inaccessible to insects and rodents. Outside storage of unprotected plastic bags or wet- strength paper bags or baled units containing garbage or refuse is prohibited. Cardboard or other packaging material not containing garbage or food wastes need not be stored in covered containers. (2) Garbage refuse storage rooms, if used, shall be constructed of easily cleanable, nonabsorbent, washable materials, shall be kept clean, shall be insect-proof and rodent- proof, and shall be large enough to store the garbage and refuse containers that accumulate. (3) Outside storage areas or enclosures shall be large enough to store the garbage and refuse containers that accumulate and shall be kept clean. Garbage and refuse containers, dumpsters, and compactor systems located outside shall be stored on or above a smooth surface of nonabsorbent material such as concrete or machine-laid asphalt that is kept clean and maintained in good repair. Disposal (1) Garbage and refuse shall be disposed of often enough to prevent the development of odor and the attraction of insects and rodents. (2) Where garbage or refuse is burned on the premises, it shall be done by controlled incineration that prevents the escape of particulate matter in accordance with law. Areas around incineration facilities shall be clean and orderly. Reasoning Proper storage and disposal of garbage and refuse is necessary to minimize the development of odors, to prevent such waste from becoming an attraction and harborage or breeding place for insects and rodents, and to prevent the soiling of food preparation and food service areas. Improperly handled garbage creates nuisance conditions, makes housekeeping difficult, and may be a possible source of contamination of food, equipment, and utensils. Examples of Violations • Garbage stored in unprotected plastic bags outside of building • Lid on outside garbage storage container left open • Refuse containers not cleaned frequently • Drain plugs missing on dumpster-type storage units • Outside refuse area not kept clean and neat • Outside garbage cans and dumpster-type storage unit set on unpaved area

35. 21 nature. Market research and analysis should be sensitive to trends in the economy and specific industry, the plans of direct and indirect competitors, and shifts in consumer preferences. It is also important to understand what business you are really in. For example, many of the major oil company franchisors thought that they were in the gasoline business until they realized that they were in the convenience business and quickly jumped into mini-marts or fast-food and quick service restaurants either directly or via co-branding. 1.5.7. Comprehensive training programs for franchisees The key point behind franchising is “uniform customer experience”, which means customers can expect the same feeling/product/service/satisfaction… across all units of the system. And the only way to achieve this is through training. The nature of the industries suitable for franchising is labor intensive. Business-format franchising, in which the services and fast food accounts for highest number of units, has a relatively high turnover rate, especially in stores and restaurants (see table 1.4). Hence, consistent and continuous training support plays a major role in maintaining service quality across the system.

36. 22 Table 1.4: Average annual outlet turnover rates for selected industries Source: Scott A. Shane (2005): “From Ice cream to the Internet – Using franchising to drive the growth and profits of your business” – Pearson Education, Inc. The training should integrate all of the latest education and training technologies and that take place both at the company’s headquarters and on-site at the franchisee’s proposed location at the outset of the relationship and on an ongoing basis. Table 1.5 provides a sample training agenda from a restaurant franchisor.

37. 23 Table 1.5: Portion of a sample training agenda from a restaurant franchisor Source: Andrew J. Sherman (2004): “Franchising & Licensing – Two powerful ways to grow your business in any economy”, American Management Association (AMACOM) 1.5.8. A set of carefully developed uniform site selection criteria and architectural standards To the success of a franchising system, location plays a very important part, especially for such industries as fast food, retail, restaurant… With a good site, the franchisee not only gets much higher sales but also contributes to building brand awareness and brand preference for the system. However, to develop site selection criteria, the franchisor have to clearly understand the market, target segment as well as the purchase behavior

38. 24 of the target customers. Figure 1.9 depicts the relationships between the types of purchasing behavior exhibited and level of consideration given to a particular purchase in the context of the required real estate, not mentioning the product/service price changes. Figure 1.9: Purchase behavior quick screen Source: Stephen Spinelli, Jr., Robert M. Rosenberg, Sue Birley (2004): “Franchising – pathway to wealth creation”, Prentice Hall The site selection criteria should aim to find optimal location, sometimes not the best location out there, as rental fee is one of the biggest operation cost for franchisee. 1.5.9. A franchisee profile and screening system The purpose of this system is to identify the minimum financial qualifications, business acumen, and understanding of the industry that will be required by a successful franchisee. 1.5.10.An effective system of reporting and record keeping A thoughtfully designed reporting & record keeping system can benefit the franchisor in 2 ways. Firstly, it can help to maintain the performance of the franchisees and ensure that royalties are reported accurately and paid promptly. Secondly, through analyzing

39. 25 the performance of outlets, good practice or initatives of some outlets can be multiplied and practised across the network, and lift the performance of the whole franchising system. 1.5.11.Field support staff These people play a very important role in maintaining quality and uniform operations in the system. They are skilled trainers and communicators and must be available to visit and periodically assist franchisees as well as monitor quality control standards. 1.5.12.Research and development capabilities As time goes by, the taste of consumers in the same market may change. Besides, by expansion, the franchise system often enter new markets with different culture, habit, needs and wants from the customers, especially when it is in an overseas market. Hence, the franchise company must have the capabilities for the introduction of new products and services on an ongoing basis to consumers through the franchised network. 1.5.13.National, regional, and local advertising, marketing, and public relations programs A strong brand brings customers to franchisees, and brings new franchisees to the franchisor. From a debt-financing perspective, a successful franchise brand carries a preexisting recognition that lifts up the confidence in creditors. Therefore, both franchisor and franchisees may have quicker and easier approach to bank loans for expanding business. Franchise systems employ different types of marketing/advertising programs based on their industry and business model. The three most common are national/general, local, and cooperative/regional advertising. National advertising is generally for brand and large scale advertising campaigns; local advertising is usually determined by the franchisee and specifically advertises the unit;

40. 26 cooperative/regional programs usually promote within a geographically designated market area. Smaller systems may only have one general advertising program. Table 1.6 shows the amount (in percentage) of money that franchise systems use for the 3 types of marketing/advertising in selected industries. Table 1.6: Average advertising fee by industry Source: International Franchise Association (3/2007): “The Profile of Franchising” 1.6 Success factors applied to Jollibee case In the previous part, we have summarized the key success factors for franchise system in general. In this part, we are going to use these factors to analyze the success of one of the biggest franchise system in ASEAN countries: the Jollibee Foods Corporation (JFC).

41. 27 1.6.1 Corporate profile:18 · Foundation: 1975 in Quezon City, Philippines · Incorporated: 1978 (100% Filipino Corporation) · Headquarters: Emerald Ave. Ortigas Center, Pasig City, Metro Manila, Philippines · Founder, President & CEO: Tony Tan Caktiong · Industry: QSR (Quick Service Restaurant) · Consolidated System-wide Retail Sales: 51,550 million Philippine Pesos (2007) (1,186 million USD) · Net Income: 2,388 million Philippine Pesos (2007) (55 million USD) · Number of stores: 1,639 (Philippines 1,460 and abroad 179 as of fiscal year end of 2007) · Number of employee: 32,918 (as of fiscal year end of 2007) · Subsidiaries: Chow King, Greenwich, Red Ribbon, Delifrance, Yonghe King, Chun Shui Tang, Manong Pepe’s, Jollibee Foundation, etc.. 1.6.2 Analyze the success of JFC by key franchising success factors 1.6.2.1. Successful prototype: Good Tony Tan Caktiong (TTC) and his family opened 2 Ice cream parlors at Cubao, Philippines in 1975. After 2 years, they started to offer hamburger sandwiches and chicken. In 1978, when they already had 6 ice cream parlors which were running very well, they decided to change to hamburger chain named Jollibee. They spent another 2 years learning from fast food chains and preparing themselves before the 1st franchise owned store opened at Ronquillo Sta. Cruz, Philippines. It took them 5 years for pilotting compared to the average 7.1 years of fast food industry in table 1.3 18 JFC official website: www.jollibee.com.ph

42. 28 1.6.2.2. Management team: Excellent One of the major reasons for JFC’s success is the role of Tony Tan Caktiong (TTC). He is a visionary leader who told his friends in 1978, when he was asked if he would get a McDonald’s franchise, that “if you (get a) franchise, you can’t go outside the Philippines”. TTC hired a franchise consultant who went to the U.S. with TTC to see and learn how McDonald’s and fast food franchise systems operated there. Back to the Philippines with what they observed in the U.S., TTC and the franchise consultant started to build Jollibee into a fast food chain applying the operation methods of McDonald’s. In 2004, Tony Tan Caktiong was awarded “World Entrepreneur of the Year” by Earnst & Young for his outstanding leadership and achievement. 1.6.2.3. Capitalization: Good We do not have data about the initial investment of JFC. However, from the good operations of the 6 stores that JFC had before deciding to go franchise, we can see that the income from the first 6 stores played a very important part in financing for the franchise system in the first days. 1.6.2.4. Trade identity: Good When they decided to build a fast food store chain, they were looking for a symbol that would represent the group, and because Tony was very impressed with Disneyland characters, they decided on a bee. The bee is a busy creature that produces honey – one of life’s sweetest things. They thought it would be a very good symbol to represent everybody. They decided they would all be very busy and happy at the same time, because if they were busy but not happy, it wouldn’t be worth it. That’s why they put the word jolly and just changed the “y” into “i” to form a brand name - JOLLIBEE. From the fact that English is the official language in the Philippines, Jollibee is a good brand name which is easy to call and meaningful. Together with the name, the Jollibee logo were drawn then and kept until now (see figure 1.10). All the trade identities were registered before the 1st franchise owned store opened in 1980.

43. 29 Figure 1.10: Jollibee logo Source: Jollibee official website: www.jollibee.com.ph 1.6.2.5. Methods of operation and management: Good The operation process of Jollibee is aligned with the same basic idea as McDonald’s – to offer the customer fast food. Main process of store operation is ordering, preparation, food supply management, and accounting. After McDonald’s entered the market, the Jollibee management changed the waiters – served-system to self-served-system with ordering in counters through computerized cashiers and efficient fast food production system was established. To realize such system, Jollibee introduced “Food Utilization Management System” – highly developed computerized system for ordering, preparation, food management, and accounting process in 1984. Jollibee developed “Drive-Through System” with the states of the art technology in 1989. Jollibee also utilizes high technology to ensure the quality of the products and maintains its own research and development unit. Thus the operation of Jollibee is standardized and systematized for rationalization.19 19 Kleinfelder, Philipp (2004): “American Influence on Filipino Food Culture – A Case Study,”

44. 30 1.6.2.6. Market demand: Excellent Understand the local market demand is the key weapon that helped Jollibee won the battle with McDonald’s in the Philippines. Back to 1977, when they were still selling ice cream, TTC and his family decided to add hamburger and chicken to the menu because many customers told them that they did not want to eat just ice cream. 1 year later, JFC was incorporated because they realized the market opportunity for fast food franchise. When McDonald’s came to the Philippines in 1982, JFC relied on the local market understanding to choose the “glocal strategy” to compete with the global giant (see figure 1.11) Figure 1.11: Jollibee strategy Source: Khanna, Tarun, and Krishna G. Palepu (2006): “Emerging Giants: Building World-Class Companies in Developing Countries,” Harvard Business Review They knew the Filipino’s taste buds and what he liked in food, so they offered him flavorful and good-tasting products. He likes pasta, so they started offering spaghetti. He likes chicken, so they came up with good fried chicken by mixing different flavors.

45. 31 They also knew something important all along: Filipino taste is sweet. Hence, the food from Jollibee is often preferred by Filipinos compared to Western fast food chain. 1.6.2.7. Training: Good JFC provides training support to the franchisees and their imployees via 2 methods:20 a. Classroom training · Basic Operations Training Program (BOTP) · Store layout & design · Equipment specifications · Furniture & fixtures · Construction management b. On-site training · Store operations management · Advertising and marketing program · Product development · Manufacturing & logistics 1.6.2.8. Site selection criteria: Good We do not have the criteria to select store location from Jollibee. However, from the locations that Jollibee have in HCMC, we can find the criteria of Jollibee as follow: · Location: corner store or big space on main street or shopping malls · Size: 200-300m2 in total · View: eye-catching, signboard can be easily seen from 50m · Traffic: Busy traffic but slow speed. These criteria are similar to other fast food chains in HCMC such as KFC, Lotteria, Pizza Hut… 1.6.2.9. Franchisee screening system: Good 20 JFC official website: www.jollibee.com.ph

46. 32 Jollibee screen the franchisees in 6 main categories: · Personal information (family, health, legal issues) · Educational background · Business experience (both current and previous businesses) · Personal financial and social background · Business plan The franchise application of Jollibee can be found in Appendix 1 1.6.2.10. Reporting and record keeping system Jollibee introduced “Food Utilization Management system” in 1984, which is a highly developed computerized system for ordering, preparation, food management, and accounting process. Besides, Jollibee has commissary system which is a network of production and distribution facilities strategically located to efficiently supply its widespread outlets. This commissary system consists of sourcing of raw materials and ingredients, warehousing, manufacturing of processed food for stores, physical distribution and logistics. 21 1.6.2.11. Field support staff: Good Like any other large franchise system, Jollibee maitains a big team of field support staff (also called Quality Management team) to ensure the food safety, quality and cleanliness in the stores (see table 1.7) Field support staff Responsibilities · This position is directly responsible for monitoring Food Safety, Quality and cleanliness in the stores. · Develop, conceptualize, and implement Food Safety and Cleanliness Monitoring program. · Coordinates & assist the QA-Store group on Food 21 Kleinfelder, Philipp (2004): “American Influence on Filipino Food Culture – A Case Study,”

47. 33 Related programs & activities Requirements · He/she must be a graduate of Industrial Engineering, Hotel and Restaurant Management or equivalent. · At least 2 years of working experience in the related field is required for this position. Source: Jollibee official website: www.jollibee.com.ph 1.6.2.12. R&D: Good From a simple process in which family members discussed about what new products customers like and TTC’s sister, who is a good cook, would come up with a new recipe for all family members to taste and comment, now JFC has a sophisticated and more careful process to offer a new product (see figure 1.12). Figure 1.12: Jollibee’s R&D process Source: Tony Tan Kaktiong in an interview with Entrpreneur Magazine

48. 34 1.6.2.13. Marketing & Advertising: Good In 1983, Jollibee launched the “Langhap-Sarap” TV ad campaign. This local phrase means “you can smell how delicious it tastes”. The campaign was considered a major success which creates a bonding between company’s promise and Filipno’s habit of sniffing the aroma of food before eating. It was so successful that “langhap-sarap” became an identity of Jollibee and is still used up to now. For public relations, JFC founded the “Jollibee Foundation” in 2004 and since then has continuously been giving back to the community through various charity programs such as “Sabi ng Jollibee, Kaya Mo Kid!”, “MaAga ang Pasko”, “Nurture the Future”, and the hiring of hearing- impaired crew members.22 Chapter 1 summary: this chapter has helped us to understand what franchising is, its history, how many types of franchising are being used and why and in which industries entrepreneurs choose franchising as a shortcut to business expansion. More importantly, the success factors for franchising are listed and analyzed through the successful case of Jollibee Foods Corporation in the Philippines. These data provide us a solid foundation for studying the franchise market in Vietnam (Chapter 2) and build up a framework to build a successful franchise system for Vietnamese companies (Chapter 3). 22 JFC official website: www.jollibee.com.ph

49. 35 CHAPTER 2: FRANCHISING IN VIETNAM 2.1. An overview of Vietnam franchising market Franchise industry is considered to be started in Vietnam in early 1990s with some international brand names such as KFC, and especially the phenomenal expansion of Trung Nguyen coffee with over 500 shops. Although Trung Nguyen coffee was not 100% a franchise system, it still had the typical characteristics of franchising. Hence, Trung Nguyen is considered to be the 1st Vietnamese franchisor in Vietnam. Since then, franchising has been growing steadily in this market. In 1996, the total revenue of all franchise businesses in Vietnam was only 1.5 million USD with an annual growth rate of 15%, it is forecasted that the total revenue will be 36 million USD with a growth rate of 35%. 23 Figure 2.1: Vietnam franchising market size (US $ mln) Source: Vietnam franchising association Figure 2.1 shows us the rapid expansion of franchising sector in our economy in the last 15 years. We can easily figure out that the increase in revenue becomes faster and 23 Saigon Economic Times

50. 36 faster recently. In the first five years, the growth rate was 200%, but in the second five years the growth was 300%, and from 2005 till now, the revenue of franchising sectore increases by 400%. This impressive growth rate proves that franchising is getting “hotter” in Vietnam nowadays. According to World Franchising Council (WFA), currently there are nearly 90 franchise systems operating in Vietnam with over 800 outlets nationwide. 24 Despite the impressive growth of franchising in Vietnam, our market is much too small compared to other countries in ASEAN region. Table 2.1 shows that in 2008, we were just equal to 2.1% of Malaysia market, 1.3% of The Philippines market, 1.0% of Thailand and 0.3% of Indonesia.25 Table 2.1: Vietnam franchising market compared to other ASEAN countries Country Franchising revenue 2008 (US $ mln) Population (7/2010 est) GDP per capita (PPP) Vietnam 19 88,576,758 2,900 Malaysia 902 25,715,819 3,300 Philippines 1,424 97,976,603 14,900 Thailand 1,946 65,998,436 8,200 Indonesia 5,583 240,271,522 4,000 Source: Excerpt from Philip M. Parker (2003): “2003-2008 World outlook for franchising”and “The CIA World Fact Book 2010” 24 Nguoi dai bieu nhan dan newspaper, http://www.nguoidaibieu.com.vn/pPrint.aspx?itemid=87148 25 Philip M. Parker (2003): “2003-2008 World outlook for franchising”, copyright ICON group Ltd.

51. 37 From above table, we can also see the great potential of Vietnam market for franchising businesses. Comparing to the nearest market size in the list – Malaysia – we are only 2.1% in revenue, but Vietnam has 3 times bigger population with GDP per capita not much lower. Hence, we can expect at least the same size of Malaysian market in the near future. That is why Malaysian Franchising Association forecasted that Vietnam franchising market will grow with a pace of 50% per year, in the next few years to come. Regarding the sector structure, also according to Malaysian Franchising Association, retail forms a quarter of the franchise sector in Vietnam, followed by beverages (20 per cent), restaurants (16 per cent), fashion (9 per cent), education (5 per cent), while the rest are other businesses.26 Figure 2.2: Vietnam franchise sector structure Source: Malaysian Franchising Association 26 Malaysian Franchising Association: “Opportunities for Malaysian franchises in Vietnam” seminar, Kuala Lumpur, 7 Oct 2010

52. 38 In terms of geographic markets, Ho Chi Minh City is the biggest market in the country, accounts for 31.5% of the total market. Hanoi also plays a very important part as the 2nd largest market for franchising with 26.7%27 Table 2.2: Vietnam franchising in 2008 City World rank US $ mln % Country Ho Chi Minh 1,202 6.09 31.46 Hanoi 1,263 5.17 26.70 Da Nang 1,386 3.49 18.05 Hai Phong 1,655 1.52 7.83 Can Tho 1,658 1.51 7.81 Others 1.58 8.15 Total 19.35 100.00 Source: Philip M. Parker (2003): “2003-2008 World outlook for franchising”, ICON group However, Ho Chi Minh City still has a very long way to go in order to reach the size of other biggest city markets in ASEAN countries. Bangkok has a 185 times bigger market than Ho Chi Minh city, Manila market is 128 times bigger than HCMC, Jakarta – 91 times and Kuala Lumpur is 20 times (Table 2.3) 27 Philip M. Parker (2003): “2003-2008 World outlook for franchising”, copyright ICON group Ltd.

53. 39 Table 2.3: Franchising market size of biggest cities in ASEAN City World rank US $ mln Ho Chi Minh 1,202 6.09 Kuala Lumpur 358 123.63 Jakarta 221 552.60 Manila 207 728.10 Bangkok 197 1,125.04 Source: Philip M. Parker (2003): “2003-2008 World outlook for franchising”, ICON group Ltd. All of the above data show the great potential lying ahead of Vietnam franchising sector. We can foresee a very active and promising industry that can contribute a lot to the economic development of Vietnam. In the next parts, we are going to analyze the franchising environment of Vietnam and whether Vietnamese companies have utilized the great chance to grow in this sector. 2.2. Franchising environment in Vietnam The franchising environment in emerging markets can be judged from political, legal, economic, financial, and social perspectives. Table 2.4 summarizes the favorable and unfavorable factors associated with the franchising environment in Vietnam. This table will show the chance for Vietnamese entrepreneurs to build their own franchise systems.

54. 40 Table 2.4: Franchising business environment in Vietnam Environment factor Description Favorable/ Unfavorable Political - Low political risk, stable government - Encourage private economic sector - Favorable - Favorable Legal - Commercial Law 2005 mentioned about Franchising - The legal environment just reach basic standard, still lack of support to franchising - Favorable - Unfavorable Economic - Market potential of about 85 million people - Fast developing economy - Large pool of skilled labor and management talent - Moderately developed infrastructure - Spread out population concentration - Favorable - Favorable - Favorable - Favorable - Favorable Financial - Large financial sector with extensive resources and infrastructure - Declining inflation rate - Currency devaluation - Declining bank lending rate - Favorable - Favorable - Unfavorable - Favorable Social - Young generation with modern consuming culture - Growing entrepreneurial spirit - Sophisticated cuisine culture - Favorable - Favorable - Favorable Source: Author 2.2.1. Political environment In general, Vietnam is considered to have a stable political environment compared to other countries in South East Asia. Vietnam has less ethnic contradicts or religion

55. 41 issues than neighboring countries such as Indonesia, Malaysia, Philippines, Thailand or China. Since 1990 until now, except for Singapore, almost all other countries in ASEAN region have had political unrest. Meanwhile, Vietnam has been successfully keeping a stable political environment under the leadership of Vietnamese Communist Party. This stability has made a major contribution to the economic development with steady growth in GDP and promising macroeconomic factors. In the report from the Political & Economic Risk Consulting Organization (PERC) in Hong Kong, Vietnam ranked 1st position in terms of political and social stability.28 Vietnam have also been strongly encouraging the private economic sector to develop. Resolution number 14 of the Central council (IX term) regarding renovating the policy to encourage the development of private economic sector in 2003 has increased the quality and quantity of companies in the private sector, making an important contribution to the socio-economic development. After 6 years applying Corporate Law, from 1-Jan-2000 to 31-Dec-2005, there were 158,153 newly registered companies. Daily registration in this period was equal to 3.75 times the period of 1991- 1999. 29 The growth in production of private sector even surpassed the FDI sector since 2000. Among top 500 biggest companies in Vietnam in 2009, the private sector accounts for 30%.30 28 FIA – MPI Vietnam: http://fia.mpi.gov.vn/Default.aspx?ctl=Article&MenuID=170&aID=184&PageSize=10&Page=0 29 Centre for Corporate information – Ministry for Planning and Investment 30 VOV news: http://vovnews.vn/Home/Khuyen-khich-phat-trien-kinh-te-tu-nhan/20104/140008.vov

56. 42 Table 2.5: New companies registered by year Type of company 91-99 2000 2001 2002 2003 2004 2005 Private 29,135 6,412 2,229 6,532 7,085 10,246 11,366 Limited 15,310 7,304 7,179 12,627 15,120 20,145 20,674 Joint stock 524 726 1,243 2,305 3,175 6,470 6,675 Joint venture 2 0 0 1 7 8 1-member limited 0 0 59 88 125 130 Total 44,962 14,444 21,040 21,523 26,009 36,993 38,144 Source: Centre for Corporate information – Ministry for Planning and Investment 2.2.2. Legal environment When Trung Nguyen coffee used franchising method to expand their business, franchising was still a very strange term to Vietnam law. Only until 1998, in Circular 1254/BKHCN/1998 guiding for Decree 45/CP/1998 on technology transferring, was franchising mentioned in session 4.1.1. In February 2005, Vietnam government issued the Decree 11/2005/NĐ-CP on transferring of technology, in which franchising was mentioned as one case of technology transferring. In the same year, Vietnam Civil law, clause 755 stated that franchising is one of the objects of technology transferring.

57. 43 Since 2006, franchising has been officially & legally accepted in Vietnam. Commerical Law 2005 (effective date of 1/1/2006) spent the whole session 8 in chapter VI to define franchising activities. On 31/3/2006, the government issued Decree 35/2006/NĐ-CP giving detail explanations for Commercial Law regarding franchising. 2 months later, Ministry of Trade issued Circular 09/2006/TT-BTM (dated 25/5/2006) to guide for registering franchising activities. These are the legal base for franchising to develop in Vietnam. However, in all of the above mentioned legal documents, the relationship between franchisor and franchisees is not monitored. The franchisor is not obligated to disclose some important items to franchisees before selling the franchise to them. On the contrary, almost all the countries where franchising is highly developed have applied the Uniform Franchise Offering Circular (UFOC) from U.S law. The UFOC is a standard document; all franchisors must provide the same 23 items of information. Table 2.6 below lists the items that franchisors in United States are required to disclose to potential franchisees.

58. 44 Table 2.6: Items required for disclosure in a UFOC Source: Scott A. Shane (2005): “From Ice cream to the Internet – Using franchising to drive the growth and profits of your business” – Pearson Education, Inc The required documents in UFOC set a higher standard for all franchisors before starting to sell the franchise, which will make franchisors more professional and are more likely to succeed.

59. 45 2.2.3. Economic environment Since “Doi moi” in 1986, Vietnam economy has constantly been growing at very high rate. The average GDP growth rate in 20 years since 1990 till 2009 was higher than 7%. 31 GDP per capita has grown 10 times after 20 years. Vietnam has a potential market of 86 million people, ranking 13th in the world, 28% of which are living in urban areas. 32 This provides a very promising business opportunity for franchising. Table 2.7: Annual GDP growth rate & GDP per capita of Vietnam (‘90-‘09) Year Population ('000 people) GDP at constant price (VND Bn) GDP growth rate GDP per capita (USD) 1990 66,016.7 131,968 5.10% 105 1995 71,995.5 195,568 9.54% 288 2000 77,630.9 273,666 6.79% 391 2001 78,621.0 292,535 6.84% 413 2002 79,538.7 313,247 7.20% 440 2003 80,468.4 336,242 7.26% 492 2004 81,437.7 362,435 7.70% 552 2005 82,393.5 393,031 8.43% 636 2006 83,313.0 425,135 8.17% 723 2007 84,221.1 461,189 8.50% 835 2008 85,122.3 489,833 6.20% 1024 2009 86,024.6 515,909 5.32% 1040 Source: General Statistics Office Vietnam government has been putting on big effort to improve the infrastructure. Although our infrastructure has not reached the standard of other ASEAN countries such as Thailand, Philippines…, we have seen great improvement in this field recently. 31 Economic development magazine, issue 219, January 2009 32 CIA – The World Factbook 2010

60. 46 Table 2.8: Selected information depicting Vietnam infrastructure Electricity production 86.9 billion kWh (2009 est.) Telephone main lines 29.591 million (2008) Mobile phone users 70 million (2008) Internet users 20.834 million (2008) Roadways 171,392 km Ports & harbors 5 Airports 44 (2010) Source: CIA – The World factbook 2010 Vietnam market also provides an advantage for franchising businesses: labor. Vietnam has a young population with a median age of 27.4 years, and 55.5% of the population, which is equal to 47.7 million people, is in the labor force, 49.6% of which are working in urban areas. There are over 0.2 million students graduate every year.33 The young and dynamic labor force will help the new franchise systems grow faster. 2.2.4. Financial environment By May 2008, there are 4 state owned banks, 36 joint stock banks, 44 foreign & joint venture banks in Vietnam34 . The competition between banks, especially commercial banks, in urban area is becoming fierce. Huge amount of money has been invested into building the infrastructure for financial environment. Companies have more options to access financial resources. This data suggests that there is adequate capital and 33 General Statistics Office 34 Tuoi Tre newspaper: http://tuoitre.vn/Kinh-te/275119/Ngan-hang-thuong-mai-tai-Viet-Nam-Nhieu-hay- it.html

61. 47 infrastructure available within the country to adequately support franchise development and expansion. Vietnam has managed to lower the inflation rate from the double-digit inflation in 2007 & 2008 down to 7% in 2009 and 2010 (estimated). This lowered inflation rate will help new franchisors to make long-term plans better. Figure 2.3: Vietnam inflation rate Source: General Statistics Office However, since 2005, local currency (VND) keeps on shrinking in value. In the last 5 years, Vietnam dong has lost over 20% value compared to USD (see figure 2.4)

62. 48 Figure 2.4: VND/USD exchange rate Source: CIA – The World Factbook 2010 2.2.5. Social environment The society of Vietnam has been changing rapidly since “Doi moi” in 1986. Together with the fast economic development, the consumer behavior has gradually changed accordingly. People are spending more, requiring branded products, and are willing to pay more for better service. This trend has expanded the customer base for franchising business. With around 25 million people are living in urban areas, the potential for franchise systems are predictably fruitful. Besides, the social conception about entrepreneurship has been improved. Entrepreneurs are now deservedly respected. They are considered to contribute to economic development. Hence, together with the encouraging policies from the government, this positive social conception has boosted entrepreneurship. This is a good sign for franchising business as there will be larger pool of franchisees for franchise systems to grow. Tải bản FULL (122 trang): https://bit.ly/3WP1w8H Dự phòng: fb.com/TaiHo123doc.net

63. 49 Regarding cuisine culture, Vietnam foods are considered gentle, healthy and fresh. We have plenty of foods that can be franchised such as Pho, spring rolls, Hue food, noodle soups… The success of Pho 24 has proved that Vietnamese food can be franchised at the same level with Japanese sushi or Italian pizza. In short, although Vietnam franchising market is still under-developed and we are only at the very first steps to build a competitive franchising market, from what we have analyzed in the macro environment to see that Vietnam has what it takes for a big franchising market. 2.3. Challenges to opening a new franchise system in Vietnam Despite the fact that the franchising environment in Vietnam has many favorable conditions for developing franchise business, the ratio of franchise systems developed & owned by Vietnamese entrepreneurs. Among 90 systems with 800 outlets, Vietnamese brands only get a humble share. Most of the revenue comes from big international brands such as KFC, Lotteria, Jollibee…, and there are only some well- known Vietnamese brands in franchising sector, such as Pho 24, Kinh Do bakery… According to Ministry of Industry and Trade, there are 39 foreign brands doing franchising business in Vietnam by the end of 2009. There is no clear statistics for Vietnamese franchising brands as these companies are registered at local Department of Industry and Trade. Table 2.9: Foreign franchising brands registered in Vietnam # Company name Nationality Franchising industry 1 Aldo Group International AG Swiss Retailing fashion products under brand names of Aldo group Tải bản FULL (122 trang): https://bit.ly/3WP1w8H Dự phòng: fb.com/TaiHo123doc.net

64. 50 2 Avis Asia Limited England Rent-a-car business 3 Budget rent a car system Inc. USA Rent-a-car business 4 Cartridge World PTY Ltd Australia Information technology 5 CBTL Franchising, LLC USA Beverage (The Coffee Bean brand) 6 Cherie Hearts Child Development Pte Ltd Singapore Education for kindergarten children 7 CJ Foodville Co., Ltd. Korea Bread and cake 8 Cleverlearn Inc. USA English education 9 Colliers International Singapore Pte Ltd Singapore Real estate services 10 Vogelsitze GmbH Germany Vogelsitze products 11 Dale Carnegie & Associates, Inc USA Corporate training 12 England Optical Group Management (Central) SDN BHD Malaysia Eye glasses shops (E-Optics brand) 13 Escada Aktiengesellshaft Germany Women fashion (Escada brand) 14 Galien Pharma France Pharmaceutical production

65. 51 15 General Nutrition International, Inc USA Healthy nutrition products 16 Gloria Jean’s Coffee International Pty Australia Beverage (Gloria Jean’s Coffee shops) 17 GR Vietnam International Convenience stores 18 Gymboree Play Programs, Inc USA Children education 19 Hard Rock Limited USA Restaurant (Hard Rock café brand) 20 IllyCaffe’ S.P.A Italy Beverage 21 Jetstar Airways PTY Limited Australia Airways 22 Karrox Technologies Limited India Information technology education 23 Kinderland Educare Services Pte Ltd Singapore Kindergarten education 24 La Senza International Corporation Canada Underwear fashion 25 Lotteria Co.,Ltd Korea Fastfood restaurant 26 MK Restaurant Co., Ltd Thailand Restaurant

66. 52 27 Moonsoon Accessorize Limited England Fashion shops 28 Sandler Systems Inc USA Sales training 29 Sergio Rossi S.P.A Italy Fashion shops (Rossi brand) 30 Shoe Box Franchising, LLC USA Footwear & bags fashion 31 Sirva (Asia) Pte Limited Singapore Packing & transporting services 32 Spinelli Pte Ltd Singapore Food & beverage restaurant 33 The Body Shop International Inc England Cosmetics retail 34 Genesis Korea Fastfood restaurant 35 V. W. F. G., Inc, USA Fitness service 36 Winn Enterprises, LLC USA Real estate service 37 WSI Emerging Markets Ltd Canada Internet business 38 Yum! Restaurant International Pte., Ltd Singapore Food and beverage 39 Yum! Restaurants Asia Pte Ltd Singapore Fastfood restaurants (KFC) Source: Vietnamfranchise.wordpress.com 6794012

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